Segregated Funds, similar to Mutual funds, are type of an investment account. But unlike mutual funds, Segregated Funds are more of an insurance type investment vehicle where your principal is guaranteed 75% to 100% and some contracts offer guaranteed bonus of 5 % which can provide you cushion at the time less return coming to the portfolio from market and be utilized at the time of retirement.
As segregated fund offers guarantee on account of income and take the risk of any loss, so they charge fees in terms of Management expenses which is little higher than the fees charged in Mutual fund. The clients are given the option to pay fees according to various options available like in Back End Fees option, the fees to be charged decreases over time. Along with Back End Fees option, it also features Low Load and Front End Load fees option. Re-balancing services are provided by some companies.
Segregated Funds offer various benefits over time which has been described below:
• Guaranteed Maturity Benefits: In case the market collapses just when your segregated funds are close to maturity date, even then you will be guaranteed at least 75 percent of the capital invested by you. However, it can be more than 75 percent, but not less than 75 percent. Even if the market value is zero, your risk of loss will be 25 percent maximum and not beyond that. Whereas in mutual funds the risk of loss is almost 100 percent depending upon the market value of investment at the time of maturity.
• Guaranteed Death Benefits: In case of death of account holder before the maturity, a specific amount of return is guaranteed to the beneficiary (named by account holder) who will be paid regardless of market value of the investment at the time of death of account holder. There is also a 100 percent death benefit option made available in which account holder is guaranteed 100 percent return to the beneficiary regardless to the market value of the investment.
• Name a Beneficiary: In Segregated Funds, you are given the option to name a beneficiary. It works more like an insurance policy where you estate is kept safe as the proceeds go directly to beneficiary which adds a control feature to your estate.
• Potential Credit Protection: Segregated Funds offer potential credit protection.
• Income for Life: Under segregated funds, you are given an option to defer your maturity benefits over time which provides income for life. Adding to it is the progressive nature of income you earn.
• Reset Option: An option is given to reset your investment scheme at any time during the period of investment. In other words, you can add the income you have earned to the capital amount to increase your portfolio amount. However, this option comes with two disadvantages: You can reset your investment scheme only a certain number of times and using the reset option increases your time of maturity of the investment.
• Long-Term Protection from Creditors: The investment in segregated funds is kept safe from creditors in case of bankruptcy of account holder. The beneficiary mentioned in the investment scheme will have the first right over annuity. The only condition is that the investment must have been two years old.
• Withdrawal Option: Account holders are given an option to withdraw from their account 10 percent (20 percent in case of retirement scheme) of the investment per annum without any penalty.